Goldman Sachs: Overweight North Asia, Bullish on Second-Half Tech and Earnings-Led Rally

Overview

This week, the MSCI Asia Pacific ex-Japan Index (MXAPJ) closed up 1% amid volatility, but significant internal differentiation appeared in the market. Taiwan and Thailand led gains, while South Korea fell 6% due to substantial foreign outflows. Goldman Sachs believes that despite short-term funding pressure, fundamentals, especially earnings growth, remain the core driver of the stock market. The report maintains an Overweight view on the North Asian market and points out that in the second half, driven by AI capital expenditure and earnings upgrades, the index is expected to achieve double-digit returns.

Core views

Market Performance and Capital Flows: MXAPJ achieved its fourth-strongest performance in history in the first half of the year, driven mainly by South Korea, Taiwan, and tech hardware sectors. However, momentum recently reversed, with Emerging Market Asia (ex-China) seeing weekly foreign outflows of $16 billion USD, the fifth-largest since 2000, where Korea saw $13 billion USD outflow and Taiwan $35 亿美元 outflow. Nevertheless, retail investors continue to buy Korean and Taiwanese stocks. Second Half Strategy: Stick with the winners. Goldman Sachs emphasizes that earnings are the key driver of stock price performance. Given that MXAPJ earnings expectations are projected to grow 60% and 22% in 2026 and 2027 respectively, and current earnings revisions are positive, historical data shows such combinations usually perform well in the second half. Therefore, continuing to overweight North Asian markets, particularly sectors benefiting from AI infrastructure construction and capital expenditure cycles. Thematic Investment Opportunities: The report recommends three categories of investment themes: (1) Factors and Macro Exposure: including Growth At a Reasonable Price (GARP), Value Cyclical Stocks (global exposure better than domestic), Selected Financial Stocks; (2) Structural Themes: AI Infrastructure Hardware, Power Upgrades (Nuclear and Renewable Energy), Space Economy, Defense, and US Re-industrialization; (3) Market-Specific Themes: Focus on structural opportunities in China, South Korea, Japan, and India, such as Japan's governance reform and increased defense spending.

Analysis framework

Goldman Sachs' analysis logic revolves around 'earnings-driven' and 'structural trends'. First, by dissecting H1 market performance, identifying South Korea, Taiwan, and tech hardware as main contributors, and noting that current valuation differences are mainly explained by earnings growth levels. Second, using historical data backtesting to verify the win rate of the 'high earnings growth + positive earnings revision' combination in the second half, thereby reaching the conclusion of maintaining Overweight status. Finally, combining policy moves (such as South Korea's AI investment plan, Japan's robot strategy) and industry trends (storage chip shortages caused by AI computing demand), screening out structural themes with long-term growth potential.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Surge in AI Computing Demand Leads to Storage Chip Supply Shortage

  The research report points out that rapidly growing computing demand drove massive investments in hyperscale data centers, leading to unprecedented supply shortages and excess profits in storage chips, which is the core logic for assessing the semiconductor sector's prosperity.

• Event Betting and Behavioral FinanceExpectation Difference/Expectation Management

  Earnings Revisions as a Source of Alpha

  The report emphasizes that consensus earnings expectation upgrades (EPS upgrades) are an important source of excess returns, selecting stocks with upside potential by tracking the direction of earnings revisions.

• Quantitative/Factor/Portfolio TheoryStyle factor analysis

  GARP (Growth At Reasonable Price) Strategy

  Against the backdrop that central bank monetary policy has not fully shifted to easing and domestic demand is weak, the report prefers GARP style, which is to find companies with confirmed growth potential and reasonable valuations to balance risk and return.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• ISHARES MSCI USA QUALITY GARP ETF (GARP.US)

  As a representative tool for GARP strategy, benefiting from the report's preference for Growth At Reasonable Price stocks

  Strengths

  Aligns with Goldman Sachs' recommendation to prefer GARP style under uncertain macro environments

Key data

• MXAPJ Current Level886As of July 3, 2026
• MXAPJ 12-Month Target Price1,080Implies approx. 21.9% upside
• EM Asia (ex-China) Weekly Foreign Outflows-160 hundred million USDFifth largest single-week outflow size since 2000
• Korea Weekly Foreign Outflows-130 hundred million USDMain drag item
• MXAPJ 2026E Earnings Growth Forecast60%Strong growth expectation
• MXAPJ 2027E Earnings Growth Forecast22%Sustained high growth

Impact & implications

For investors, short-term vigilance is needed regarding foreign outflow pressure in the Korea and Taiwan markets, but this may provide opportunities for long-term positioning. Goldman Sachs suggests dealing with market volatility by holding structural winners such as AI infrastructure, power upgrades, and defense. Meanwhile, at the macro level, the Fed's dovish tendency and AI's potential deflationary effect provide support for risk assets. For investors focusing on valuation, GARP strategies and earnings revision factors are effective tools for generating excess returns in the current environment.

Risks

• Geopolitical risks (e.g., US-Iran relations, US-China relations)
• Policy uncertainty brought about by US midterm elections
• Supply pressure potentially brought about by capital market activities (e.g., IPO lock-up expirations)
• Continuous foreign outflow pressure in Korea and Taiwan

What to watch

• Q2 Corporate Earnings Reports
• Central Bank Monetary Policy Meetings (especially Federal Reserve and Bank of Japan)
• Evolution of Geopolitical Situation
• Progress of US Midterm Elections
• Tone of Economic Policy in Chinese Politburo Meeting